Think of working capital as the money a business needs to keep its day-to-day engine running — paying suppliers, holding stock, giving credit to customers. If a company runs out of this fuel mid-month, it can't pay salaries or buy raw materials, even if it's technically profitable on paper. That's why managing working capital is just as important as chasing profits.
Gross Working Capital (GWC) is simply the total of all current assets — cash, debtors, inventory, short-term investments, and advances. Net Working Capital (NWC) = Current Assets − Current Liabilities. NWC tells you the cushion a business has. If Rajesh & Co. has current assets of ₹12 lakhs and current liabilities of ₹7 lakhs, NWC = ₹5 lakhs — a comfortable buffer. A negative NWC signals danger: the firm owes more in the short run than it can quickly convert to cash.
The Operating Cycle (or Working Capital Cycle) is the time it takes for cash to travel through the business and come back as cash again. Imagine Mr. Sharma's textile firm: he buys raw cotton → stores it → converts it to cloth → sells on credit → collects payment → and then he has cash again to restart. The longer this cycle, the more money is locked up and the more working capital the business needs.
The cycle has five stages: Raw Material Storage Period → Work-in-Progress Period → Finished Goods Storage Period → Debtors Collection Period → minus Creditors Payment Period. Subtracting the creditors period is key — suppliers essentially finance part of your cycle for free. The net result is called the Net Operating Cycle (NOC) or Cash Conversion Cycle (CCC).
Factors that affect working capital needs include: nature of the business (manufacturing needs more than trading), seasonality (a mithai shop needs extra stock before Diwali), credit policy, production cycle length, and pace of business growth. This topic is asked frequently as a 4–8 mark theory/numerical question, so understand the cycle formula cold before your exam.